(photo credit: MANUFACTURERS ASSOCIATION OF ISRAEL)
During the past four years, Israeli exports have been faltering. This is due to a number of factors, such as the global economic downturn and the somewhat overvalued shekel.
According to figures published by the Central Bureau of Statistics (CBS), during the four years preceding 2008, the average annual industry export growth amounted to 12%. Industry exports amount to some 21% of GDP. This hefty rise in Israel’s industry export trade was the main reason for an annual average growth of 5% in the GDP figures.
Since the repercussions of the global economic crisis started to take effect, the rise in industry exports has registered dramatic falls. During the five years preceding 2016, average annual export growth rose by a mere 1.6%.
According to figures published by the CBS, during the third quarter of 2016 exports of goods fell by a hefty 8.2%, while the export of services fell by 1.9%. The fall in exports is affecting the economy as a whole and the manufacturing sector in particular.
In 2015, manufactured products amounted to 85% of the total export of goods.
During the first 10 months of 2016, the monthly average of manufactured exports amounted to $ 3.5 billion, a fall of $254 million, or 7% compared to a monthly average of $3.75 billion in 2015. The accumulated fall in manufactured exports during the first 10 months of 2016 amounted to 8%.
The fall in exports during 2011-2015 was reflected in lower GDP figures. Without a vibrant expanding export trade, the local economy cannot expand beyond a 2.9% growth, which is much less than the potential GDP growth of Israel.
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One of the main reasons for the fall in exports in general and manufactured products in particular is the fall in the competitive aspect of Israeli products in the world markets. This is caused by a number of factors, such as a shortage of trained industrial workers. In 2015, some 81% of local industrialists found it very difficult to recruit trained technical staff. This is understandable because technical education in Israel has been side-lined for years. In 2014, the number of technical high school students amounted to 41% compared to an average 44% in OECD countries. The shortage of trained technical staff increases labor costs and, consequently, costs in general.
Another reason is the rise in the value of the shekel. Since the beginning of 2016, the rise of the shekel has amounted to 1.5%.
In addition, production costs are high compared to other countries because of the high cost of water, as well as high taxation on both the local and national levels. In addition, Israel has a very restrictive regulatory regime, which has a negative effect on economic activity.
This is reflected in the country’s ranking in some key global indexes. In 2006 Israel ranked 23rd in the World Economic Forum. In 2016, it had fallen to 46th place out of 134. In the current ranking of the World Bank, ease of doing business in Israel ranks 52nd out of 190.
In addition, since 2000, government funding in R&D and for setting up new manufacturing industries has fallen. R&D funding fell from 2.1% of total manufacturing output to 1.0% in 2016, while government grants to industry fell from 1.1% to 0.2%.
The fall in exports is having a very negative effect on the manufacturing sectors. This radiates to the economy as a whole because manufacturing generates economic activity in other sectors, such as commerce and transportation.
I therefore call on the government to take the steps necessary to generate growth in the manufacturing sector and increase compatibility and thereby increase exports.
These steps should include the following:
1. Increase manufacturing output to 20% of GDP.
2. Reduce company tax to 6% for exporting firms located in peripheral areas; and to 12% for those in the more central areas.
3. Give grants to non-exporting manufacturing firms.
4. Nullify the regulatory and bureaucratic bottlenecks that are curbing manufacturing growth.
5. Increase government aid to small and medium-sized exporters.
6. Make funding available for a large program of technical vocation.
7. To alleviate the manpower shortage, make 4,000 work permits available to non-Israelis.
8. Make funding available to small and medium-sized manufacturers that want to modernize by adapting innovative production methods.
By helping the growth of the manufacturing industries, the government will be helping boost exports, which will benefit the economy as a whole.The writer is the managing director of the Manufacturers Association of Israel.
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